Shah commented, "The midst of an uptrend in pricing (spot pricing is up 27% since June). No other metric drives profitability more than ASPs (every 5% change in DRAM ASP affects operating margin by almost 300 bps). And operating margin in turn drives valuation (R squared 0.9 versus price-to-book). Our analysis indicates that Micron should generate 10-15% operating margin in fiscal 2017, which equates to value of at least 1.75x book or $20 per share."

While investors should own MU today for a recovery in DRAM, they believe that a manufacturing partnership with China is a kicker to shares.

"that a manufacturing partnership with China is a kicker to shares. Big picture, China consumed more than 40% of global IC supply in 2015, but produced only 15%. Silicon represents one of the biggest gaps in the country’s trade deficits. As such, China is looking to capture a larger share of the global semiconductor industry by producing more devices such as memory, logic and processors that go into consumer, automotive and industrial markets. However, we know that IP, technology and brand create high barriers. As such, we believe China is looking to partner with incumbents in the space. At the same time, we believe Micron is looking to strengthen its positioning in NAND against rivals such as Samsung and Intel. The company is lagging in scale (market share = 15%). A partnership with China would expand the company’s footprint and improve profitability."

Shah said the most likely partner is XMC, a subsidiary of China’s state-owned enterprise Tsinghua Unigroup.

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